Pricing, tax & closing
QSBS & Section 1202: The Rule Secondary Buyers Miss
The single most commonly misunderstood tax point in this market — and it usually cuts against the buyer, not the seller.
Qualified Small Business Stock (QSBS) under Section 1202 can exclude a large share of capital gains from federal tax — a genuinely major benefit when it applies. The critical, frequently-missed catch: QSBS status generally requires the stock to have been acquired at original issuance directly from the company (or via a qualifying gift, inheritance, or certain tax-free exchanges). Buying already-issued shares from another shareholder on the secondary market is a taxable purchase, not an original issuance — and it typically does not carry QSBS treatment over to the buyer.
This means a seller may be selling genuinely QSBS-eligible stock (great for their own gain, if they've met the holding period), while the buyer's newly-purchased position starts its own basis and, in most secondary purchases of existing common stock, does not itself qualify as QSBS going forward. Confirm the specific facts with a tax advisor — this is one of the areas of tax law where the acquisition mechanics matter as much as the company itself.
How it works
- The seller's QSBS eligibility (if any) applies to the seller's own gain on their sale — it does not automatically pass through to whoever buys the stock from them.
- A buyer generally gets QSBS treatment on their own future gain only if they themselves acquire stock at original issuance from the company (e.g., a primary investment, not a secondary purchase from an existing holder).
- A 2025 law (the One Big Beautiful Bill Act) changed QSBS for stock acquired after July 4, 2025: a tiered exclusion applies (50% at a 3-year hold, 75% at 4 years, 100% at 5 years) with a raised $15M per-issuer exclusion cap; stock acquired before that date generally still needs the full 5-year hold under the older $10M-or-10x-basis cap.
- Which rule set applies depends on exactly when the specific shares were originally issued — not when a later buyer purchases them secondhand.
Worked example
An investor originally purchased shares directly from the company (primary, original issuance) after July 4, 2025, with a $50,000 basis, and holds for 4 years before selling at a $2,050,000 valuation for their stake.
- Basis
- $50,000
- Sale value
- $2,050,000
- Total gain
- $2,000,000
- Holding period
- 4 years → 75% exclusion tier
- Excluded from tax (75% of gain, under $15M cap)
- $1,500,000
- Taxable gain (remaining 25%)
- $500,000
Why it matters: This exclusion applies to the person who originally bought the stock from the company. A buyer who instead purchases the same shares secondhand on the secondary market from that investor generally does not inherit this treatment for their own future gain.
Watch out for
- Never assume QSBS status "comes with" a secondary purchase — ask directly whether the company itself even qualifies as a small business under Section 1202 (there are corporate-level requirements too), and confirm your own acquisition mechanics with a tax advisor before relying on any exclusion.
- The July 4, 2025 date matters a great deal — shares originally issued before versus after that date can follow different rules even within the same company's cap table.
- State tax treatment of QSBS varies and doesn't always mirror the federal exclusion — check your state's rules separately.